SL Green Realty Corp (SLG) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Your conference is due to begin in approximately two minutes. Thank you for your patience and please continue to hold. Ladies and gentlemen, good day and thank you for standing by. Welcome to the Reckson Associates second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you require assistance during the call, please press star and then zero, an operator will assist you. This conference call is being recorded.

The following is a disclaimer for Reckson Associates: The information to be discussed on this earnings conference call, including guidance concerning the Company's future performance, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those reported . Among those are: The general economic climate, including the conditions affecting industries, tenants compete, financial condition of our tenants, changes in the supply of and demand for office and industrial properties in the New York tristate area. Changes in interest rate levels, downturns in rental rate levels in our markets and our ability to lease or release space in a timely manner at current or anticipate rental rate levels. The availability of financing to us or our tenants. Changes in operating costs, including utilities, security and insurance costs. Repayment of debt owed to the Company by third parties. Risks associated with joint ventures, liability for uninsured losses or environmental matters. And other risks associated with a development and acquisition of properties. For further information on factors that could impact Reckson Associates, references made to the Company's filings with the Securities and Exchange Commission. Reckson undertakes no responsibility to update information discussed on this conference call.

Also during this conference call, the Company may discuss non-GAAP financial measures. The GAAP financial measure most directly comparable and a reconciliation between the measures can be found on the Company's web site at www.reckson.com, in the Company's quarterly earnings press release and supplemental package.

I will now turn the conference call over to your host, co-CEO, Mr. Scott Rechler. Go ahead, sir.

Thank you, operator and thank you all for joining us on our second quarter 2003 earnings call.

With me today is Donald Rechler, our Co-CEO, and Mike Maturo, our CFO. As well as the balance of our senior manage team. Mike and I will start by providing an overview of our quarterly results, then open for for questions for us or any other members of our management team. If you have not participated in the past, we will utilize a powerpoint presentation that you can access from a web site at www reckson.com. If you have problems accessing the presentation, contact Susan McGuire, the Head of Investor Relations at 631-622-6642.

I will now turn to page 2 of the presentation, I will start by providing a summary of our quarterly highlights. During the second quarter, we reported diluted funds from operations of $35.4 million or 54 cents per share. This compares to 59 cents per share for the second quarter of 2002, which represents a per-share decrease of 8.5%. This is in line with our internal estimates and industry consensus. Our net income applicable to common shareholders totaled $7.6 million in 2003, as compared to $13.8 million in the second quarter of 2002. As expected, our overall occupancy declined during the quarter from 93.2% at the end of the first quarter to 92.2% at the end of the second quarter. That's 100 basis points decline. Year-over-year, there was a 200 basis point decline.

Our office portfolio declined 110 basis points. 80% or 90 basis points of this decline was a result of space that, as anticipated, was rejected by WorldCom and HQ Global. Our industrial portfolio declined 80 basis points since the end first quarter to 93.2%, occupied, although it declined 80 basis points on a year-over-year basis, it actually increased 120 basis points. So, I think that that showed some good performance.

Our same property occupancies are not materially different than the total occupancies so I'm not going to go through that in detail.

If you turn to slide 3, you'll note that our core same property NOI's declined on a cash basis, 6.7%, when you include the straight line rent, it declined 6.1%. When you net the joint ventures into the equation, it declined 7% on a cash basis and 6.4% on a straight line basis. I will provide more detail later as to the components of these declines, but a big function of this was the loss in occupancy and continued expense pressure.

Rent performance on renewal and replacement office space for the second quarter of 2003 was down 7.7% on the cash basis and was up 6.4% on a straight line basis. The big drop on a cash basis is a function of the fact that 70% of the same space activity related to leases on Long Island, and you may recall that our leases on Long Island had built-in rent increases so that typically our cash rent at expiration is higher than the replacement rent of the tenants taking that space. And historically you will see that the cash rent has been higher at expiration, but on an average basis, the average rent is typically had a higher level. So, this is more of a function of the makeup of the leases that were actually signed up during the quarter.

On industrial basis, you will see that we were actually flat on a cash basis and up 3% on a straight line basis.

We had extremely active quarter from a leasing perspective. We signed 57 leases and encompassing 750,000 square feet. We renewed 58% of our expiring office leases during the quarter. From the investment side, we purchased 2 industrial properties in Long Island, which are about 100,000 square feet. We expect to achieve an unleveraged initial return in excess of 10% on these investments and actually expect a decline in the near future to 11%. We also completed our 72,000 square foot industrial development in Long Island and we signed a lease for 100% of the property. We expect to achieve an initial NOI yield of 10% on this development and a straight line yield of 11%.

If you turn to slide 4, just to walk through the portfolio composition, from the portfolio stats, there really was only a few changes. There was the two acquisitions and the one development property I just spoke about which change succeed the numbers. Today we have 20.5 million square feet. 181 properties. Our NOI is broken down to 84% from our office portfolio and 16% from our industrial and R&D portfolio. When you look at it how it's broken down across our regions, Long Island is -- makes up 31% of our NOI, New York City is 30%, Westchester and Connecticut is 25% and New Jersey is 14%.

If you turn to slide 5, you know, we, again, as in the past, we have an extremely diverse pool of tenants in our portfolio. If you look at the left-hand side on the pie chart, you will note that the largest industry segments continue to be consumer products, making up 14%, financial services at 13%. Legal services at 11%. And insurance at 8%. On the right-hand side of the slide, you will note we list our top 25 tenants, no new notable additions to the top list of tenants. One that you will note, though, is that WorldCom MCI continues to fall as a meaningful tenant.

If you turn to slide 6, we try to provide additional analysis to our -- our decrease in same-property NOI. As I mentioned earlier, our same property NOI on a cash basis was down 6.7%. On the revenue side, our revenue dropped $1.2 million or 1.1%. That was driven by a $2.7 million drop due to the change in occupancy. $577,000 increase in bad debt expense. And $387,000 decrease in same-space rent. This was offset by built-in rent increases, which was $1.9 million, and increases in our escalations of about $500,000 to get to the $1.2 million net decrease or 1.1%.

As we look at our expenses, our expenses were up 9.4% year-over-year, or $3.7 million. This was driven by some of the operating expenses, particularly insurance, which was up $980,000 or 131%. Utilities was up $912,000 or about 11%. And then miscellaneous operating expenses were about $253,000. Our real estate taxes, as expected, were up 9.2%, or $1.6 million -- as many of you know, there have been rate increases in Manhattan, New York City and in our suburban markets. So, all in all, that takes you to the net decrease in NOI of $4.979 million or 6.7%.

Now I'd like to turn to the markets on slide 7. You may recall last quarter that I said that we believe tenants were sitting on the sideline during the first quarter and that there was the potential for some pent up demand to manifest itself in the pipeline. Deals, in the latter half of '03 and into '04. We do believe this is what has happened. Since the end of the first quarter, we have seen a big increase in leasing activity. As I mentioned earlier, our office leasing activity was 70% higher in the second quarter than it was in the first quarter. Overall for office and industrial, the activity was 34% more in the second quarter than it was in the first quarter.

Equally as important, since the end of the second quarter, the activity has remained brisk. We've executed approximately another 425,000 square feet of leases since June 30th. About 90% of those leases are office leases. Beyond that 425, we're currently negotiating another 200,000-plus square feet of leases throughout our portfolio and we have a substantial pipeline of leasing transactions in proposal stage behind that. So, we would definitely characterize leasing activity as picked up tremendous amount of pace and this is particularly important when you look at that we're in August, which is the summer months, which is traditionally a slower part of the year to have this much activity, I think says something about the markets. With this activity is a backdrop, we believe that the markets have bottomed and are starting to stabilize.

Tenants seeking to capitalize are acting today with a sense of urgency. They're looking to either consolidate their operations, upgrade their space or reduce rent and expend terms, to really take advantage of the present market. For example, we signed, since the beginning of the second quarter, 220,000 square feet of early renewals of tenants trying to capitalize on the opportunity. In addition, we're starting to see a big uptick in tenant expansions, which is something we have not seen for some time. Again, since the beginning of the second quarter, we signed 230,000 square feet of expansions, tenants looking to expand. So, again, that's a good sign. The sectors are really legal and insurance are predominantly the types of tenants looking for expansion at this point.

And finally, we've seen the addition of sublet space subside in all of our markets and we're seeing incidences were sublet space is being pulled from some of our markets today. I think these are all indications that the markets have bottomed and are starting to stabilize.

We've also seen strong development projects and I think that's an indication of tenants wanting to pursue higher quality assets in today's environment. For example, at 101 JFK, which is our building in Short Hills that has been occupied by American Express, I guess up to this week, we anticipate taking that offline and commencing a redevelopment now that American Express is gone and redeveloping that asset into a multitenant property. With that, we have now signed or have leased out on 50% of the building and we haven't even started the redevelopment yet. So, I think that's a very strong sign of the type of demand that we would see in that building. Also in Long Island, at our Reckson Executive Park project, we have a pipeline of transactions that would bring us to 95% of occupied, again, a good sign of tenants looking to move to the higher-quality assets.

While the markets are more active, they still remain competitive. Our tenants do have a number of choices when they're looking at space and so, you have to compete to get them. Concessions are still above normal and we would still expect markets to remain competitive for the next few quarters, even though the amount of activity has picked up. So, from our perspective, the activity is critical because we do believe that if there is activity, we will be able to gain market share and start filling some of the vacant space that we now have in our portfolio.

If you turn to slide 8, I'd like to take a moment and give a commentary on -- a short commentary on each of our markets. Starting with Long Island on the left-hand side, as you can see when you look at the markets staff, Long Island's market has remained a relatively stable for the last number of quarters. We have actually been hit by the WorldCom space, you can see, our vacancy went from 5.6% up to 9.7% when we got that WorldCom space. If you didn't have that in the numbers, it would have gone up slightly to 6.4%. So, that really is attributable to that, but still very healthy single digit vacancy in that market. In addition on Long Island, we only have about 5% of our portfolio rolling over the remainder of '03 and have a good amount of activity on that space.

In Westchester, that's a marketplace that has remained active throughout all of this. You see statistically, Westchester actually has improved quarter-over-quarter. We talked about some of the activity that with driving the statistical improvement last quarter, during some of the big blocks of vacant space. Just taking a moment to talk about some of the sub markets in Westchester, it's been a little bit slower in the Terrytown sub market with the road construction and there is a high amount of service/sales force-type tenants that haven't been as active of growers. In downtown white plains, it's been slower due to IBM putting sublet space on the market and being fairly competitive.

When you look at the east side of the county, it continues to see momentum from users coming out of New York City. This is extremely important to us because the east side is where we have our WorldCom space that was given back to us. Again, if you look at the chart, you see our vacancy went from 5.7 now up to 11.1%, predominantly because of WorldCom. And so, you know, having been in a strong market with that space is important. We actually have good activity on that space and we're hopefully going to lease the 50,000 square foot user for some of that space and have a couple hundred square foot users right behind that.

Southern Connecticut and Stanford, in particular, that's one market in has been more on the quiet side and seems to be stabilizing. Sublet space obviously if you look at this graph, is still prevalent in that marketplace. While it's prevalent, it's not the most active sublet space, many of the users have their space on the market, but are not active marketers of their space and have now found that to be that competitive. We do see good pockets of activity and where our vacant space is now is Landmark Square and the Tower and we have good activity on the key pieces of space there.

In northern New Jersey, the overall vacancy rate has been stable as you can see. This market has held up, you know, relatively well once the bulk of space came onto the market. You can see the overall vacancy rate today is 17.8%. The pharmaceutical companies are getting active again as well as some of the insurance companies, so, there is some new pockets of demand and commitments that marketplace over the last couple of quarters. In particular, we're extremely pleased with our performance in northern New Jersey where we've been able to keep our vacancy in the low single digits through this trying time and as I mentioned, are doing extremely well with our to-be redevelopment project.

Turning to Manhattan, on slide 9, starting with downtown, the financial east, the top left-hand corner, this is where we have 100 Wall Street, one of our buildings. It is a building that has been hit by WorldCom as well as other scheduled rollovers. It's a tough market in downtown but we do have some activity. We have actually activity on two of the four floors that were vacant as of the end of the quarter. We have another floor that's come back to us since then. So, two out of five vacant floors we have some activity on, but it is a tougher market and we're doing our best to gain market share and fill that space.

Going down to midtown east, this is where 919 is, and that was what makes up our presence in that market. You can see it says we have a 2.3% vacancy. Actually subsequent to the second quarter, we've had some good activity at 919. We actually signed leases that will bring this building to 100% leased. We have signed [INAUDIBLE] for 120,000 square feet, taking over space that expires in 2005. The space they're taking over is paying about $37 a foot in rent and the starting rent is in the low 50s per foot. We also signed Sheltie, one of our existing tenants, to an additional 50,000 square feet. 30,000 square feet is the space that we are recouped from HQ Global and we now have the building positioned with no significant roll into 2011. So, it's extremely well-positioned and I think have done a good job of capitalizing on getting good rent increases in that building.

Moving to midtown west, where we have the biggest chunk of space, 810 Seventh Avenue, with about 65,000 square feet back from Planned Parenthood when their lease expired. We've been -- this building is well positioned in the marketplace, although this is a tougher part of the market. We actually have a lease now going for about 20,000 square feet and so we're hoping that we are able to chop away at some of the vacancy in that market. On the Sixth Avenue rock center market, we have 1350 Avenue of the Americas. You will note our vacancy jumped in the fourth quarter when we got two floors back from Arthur Andersen. We have a lease out for one floor and good activity on the other. We feel pretty good about what's going on in that market.

Also, generally in Manhattan, we have no material space rolling for the rest of the year in any of our Manhattan office buildings. So, I think that is a positive, too.

Moving to slide 10, what we tried to do is there was a lot of leasing activity, so, we tried provide a way we could dissect how the leasing activity impacted our occupancy or provide you with a net absorption analysis. If you start on the column entitled "total adjustments." You will note that we had an inventory adjustment of a negative 1,067,000 square feet, comprised of early terminations of 290,000 square feet. That 290,000 square feet is made up of 130,000 square feet of the HQ and WorldCom Space and 110,000 square feet of industrial space. We had an expiration that impacted the inventory by 776,000 square feet. In that number there is about 220,000 square feet of leases that were scheduled to expire in the future, but we signed renewals early. So, we actually grossed that up. So, it's 1,067,000 square feet of adjustments.

On the positive side, we have short-term leases of 111,000 square feet this quarter, down from 205 last quarter. And then we had net leasing activity of 550,000 square feet, that is broken off of -- or down from 681,000 feet on a gross basis, but there was 131,000 square feet of that 681 that would apply to future periods. And lastly, leases that were signed in prior periods but would impact the second quarter of '03 of 191,000 square feet. This would result in net absorption of negative 214,000 square feet and this is how you'd reconcile from the occupancy dropping from 192.2% to 92.1% on the same basis.

If you turn to slide 11, what we tried to do on slide 11 is provide you with a sense of the underlying economics of -- and trends relating to our leasing activity during the quarter. Starting on the top left-hand side, you will note that our same space rents continue to trend down but remain positive on a straight line basis at 6.4%. As I mentioned earlier, some of this -- this number is -- will vary depending on what the composition of the spaces that were actually signed and what markets they were in. So, that may vary based on that.

On the office leasing activity, you will see we signed 533,000 square feet of office leases, that's up 70% from the last quarter. It's also our highest quarter we've had since the third quarter of 2002, when we had the Fuji transaction and related transactions. If you go to the top right-hand side and look at the effective rents spread graph, this is an important graph to us. This graph takes, again, the base rent that -- the average base rent that we are getting and deducts from it the amortization of TI leasing commissions and free rent and takes a spread between that -- what we call gross effective rent and average rent -- to see how much really it's costing us. You will see this quarter we had a reduction of about 8.9% spread between that base rent and the effective rent.

We have been expecting this number to rise somewhere into the -- the 12% range for some time. It does get weighed down, when we sign renewals or leases with little TI leases commissions really help this, but I expect to see a quarter or two in the 12% range going forward, but we actually have been able to keep this in check as we've been signing our leases. As it relates to lease term, we had mentioned a number of quarters ago that one of our objectives is to push for longer term leases. We've been successful at achieving that. This quarter, our leases had an average lease term of 8.7 years. So, they're up significantly from where we were trending in '01 and '02.

Lastly, I would take a second and talk about an analysis that we've done, looking at net effective rents and the underlying economics behind our leasing activity as it relates to our investments in our buildings. What we have done is we've taken the net effective rents and then -- and applied that to our cost basis per foot for the respective asset that that lease was signed to. And determined what yield we would be getting on that lease based on our cross spaces in that building. And so, if total, for our office leases signed during this quarter, we had a net effective rent that yielded 10.3% on our total investment in the assets where there was leasing activity. And on our industrial leases that were signed this quarter, we had a net effective rents that yielded 9.8% on the total investments where there was -- in the assets where there was activity this quarter. So, I think this is a good metric to focus on in terms of getting an understanding of while the markets have been competitive, we're still signing a good underlying economic leasing transactions.

If you turn to slide 12, just to focus a little bit on lease expirations for the next few slides, we have had about 3.4% of our revenue expiring in 2003. If you look out over the next 12 months, we only have 6% of our projected revenue expiring during the next 12 months. So, I think we're in a very good position in terms of remaining lease expirations in our portfolio. On a square footage basis, you will note from the office side that we have 4.4% left in '03 and only 7% in '04. We have a -- you know, a pop in '05 and '06, as we've discussed in the past, we believe it's a good opportunity to pick up some mark-to-market rent growth. On the industrial side, we have 1.6% left in '03 and 8.2% in '04.

If you look at the slide 13, we are here we provide you with a mark-to-market analysis. As you will see, we're still expecting positive mark-to-markets on base rental rates for our office portfolio, although, the exact amount will depend on a mix of portfolio that's being leased in each quarter. But if you take our portfolio and our internal forecast of what rents should be versus expired rents, you will see on a cash basis, we would expect 9.1% on our '03 and '04 expirations and on a straight line basis, 15.3%. Again, this is driven very much by our CBD portfolio where we have some significant growth whereas our suburban portfolio, especially on a cash basis, is flat.

If you turn to slide 14, this provides you with the same analysis looking out in 2005 and 2006. This is based on current market rents, there is no escalation of the market rents in doing this analysis. And you will see, again, we're expecting a 10.4% mark-to-market opportunity in '05/'06 based on where our rents are today versus where the market is.

If we turn to page 15 now, let's take a moment and talk about the investment markets. The investment markets are beginning to rationalize. We have seen that sales activity is significantly down from last year's outside of Manhattan. The investment activity is at a -- is doing 40% less this year than what it did last year in terms of volume. We think that the weak fundamentals have spoofed institutional investors and their ability to under write any near-term vacancy has become a challenge for them to be aggressive on pricing. There is also a belief that the recent rise in interest rates may deter some of the leverage buyers from being as aggressive or at the very least, force them to reprice their pricing on investment opportunities, which could give us some advantages. It still is a strong market for trophy-like assets and well-leased high-quality properties. We do believe that building like the GM building and 666 in Manhattan, which hasn't sold yet, but we believe will sell at premium pricing. Even in the suburbs, in Long Island, the EAB plaza building looks like it's selling for a 7.5% NOI yield on a normalized NOI, so, you can see it's a competitive environment for high quality trophy assets still.

During the year, as we said last quarter, we would expect to close on $50 million of third party investments. This does not include the option properties that we discussed last quarter. As it relates to the option properties, we have not closed on them yet because some other opportunities have arisen and we're coordinating the option properties with the other acquisitions and dispositions that we're working on and we will do that in conjunction with them. We anticipate our investment pace to accelerate in 2004, although we will continue to maintain our investment discipline and balance that with selective disposition opportunities as we go forward. We'll also continue to balance our investment activity with the desire to maintain financial flexibility and Mike will walk through our balance sheet later in the presentation.

With that, let me hand it over to Mike Maturo to walk us through the operating data.

Thank you, Scott.

If you turn to slide 16, just to cover some of the P&L data, our revenues for the quarter were $122.5 million, slightly down from same quarter last year, which reflects the occupancy decreases in some of the same space decreases that Scott had mentioned. Our operating margins for the quarter were 62% compared to about 66% last year same quarter, which, again, is a result of the occupancy and revenue decrease as well as an increase in operating expenses, some of which Scott had already mentioned. The real estate tax was up by about $1.7 million, which is a result of increases in New York City and some of the surrounding suburbs. Our insurance cost was dramatically higher than last year of about $1 million, although we have redone the policies in July of this year and we're expecting about 20% decrease on a go-forward basis. So, we kicked up some ground on the renewal of the insurance policies going forward.

Utilities were -- are about $800,000 higher than expected for the quarter. Essentially reflecting some of the cooler weather conditions in the first couple of months, April and May, as well as some gas and electric rate increases that we've experienced.

We also experienced some property-specific marketing costs directly resulting from some of the vacancies where we're doing some direct marking of some space which is a little bit higher than expected. And then some moderate costs, about $150,000, which flowed through from kind of the weather and snow cleanup related to parking lots and curbs and such.

Our marketing G&A, $9.3 million, is essentially about the run rate we had for the last quarter of about $8.3 million, plus if you recall, last quarter we spoke about the L tip that was put in place, being broken up into two pieces, a core and a long-term outperformance piece. And that core piece, for accounting purposes, needs to be amortized. So... Based on a -- an assumption of whether it will be met relative to the performance. We accrued about $1.1 million in the quarter and that represents substantially the entire increase from the run rate.

As far as other income, $4.6 million, we had $2.2 million from a land sale of First Data that we continually recognize on a cost to complete basis. We had $1.6 million of interest on notes receivable, which is consistent from last period and about $800,000 of fee income in miscellaneous, other items. Our tenant receivable of about $1.5 million is slightly less than it was last quarter, about $900,000 of that represents costs related to tenant terminations and the remaining is essentially additional reserves that we booked on a quarter-to-quarter basis. Termination fees was $473 million -- $473,000 for the quarter.

If you turn to page 17, I put together kind of a different analysis of our tenant improvement and leasing costs for the quarter to at least what we would believe to reflect the better comparison to some of the market participants out there and to look at leasing costs on an amortized square foot basis, over the lease term. And as you will see, throughout 2001, we were running at about $1.50 to $1.90 of -- per square foot over the amortized lease period. You will see in 2002 that that rate jumped up to about 2 to $2.30 continuing through to two second quarter 2003, but for the Fuji transaction in the third quarter of '02, which was a little bit above the bar, relative to the costs that were incurred in connection there. So, we anticipate going forward that this -- that our costs will range in this kind of $2 to $2.30 period. You will see in the most recent quarter, we experienced $1.89. And that's being driven by what Scott has said is what we try to do is get extended term in the leases and if you look at slide 11, you will see this period you had 8.7-year average period for our leases which essentially brings down that amount on an amortized basis. So, we've continued to believe that we will see numbers in this kind of $2 range for the foreseeable future.

Turning to page 18, just an update on the credit situation: WorldCom, MCI, rejected a total of 282,000 square feet and four locations to date. With the remaining square footage, we've executed amendments totaling for 243,500 square feet in the seven remaining locations. And essentially that is done from a business perspective and documentation and is just waiting bankruptcy approval. So, we do not expect any additional terminations based on our communications and dealings with them so far.

With respect to HQ Global, we currently bank lease approximately 160,000 square feet in eight locations. Five leases remain unadjusted and continue to operate under their terms. Two leases remain under negotiation. Again, those negotiations have been fully bedded through. We have business agreements and essentially just subject to the bankruptcy approval. One lease was restructured this quarter where there was 10,000 square feet given back of that 10,000 square feet, approximately 6,500 was released to a tenant in the building. At this time, there is no other significant tenants of this magnitude on our credit watch list, we still obviously see some smaller tenants that are running through bankruptcy and other situations that we feel comfortable relative to our reserves and so forth are covered.

If you turn to page 19, just reviewing our financial ratios for the quarter: On a interest coverage of 3.04 and fixed rate of 2.38 or down from the last quarter, again, reflecting the lower level of FFO that we spoke about in market cap -- debt to market cap actually went down as a result of some additional market capitalization from the stock price.

Turn to page 20 and looking at our balance sheet, not a lot has changed there. We have approximately $1.5 billion of debt. 1.2 of that fixed. So, we're about 20% floating, which we think is fairly moderate and comfortable position and we will look for opportunity to schedule that out in the future.

If you look at our maturity schedule, we don't have any near-term pressure other than $100 million bond that comes due in April of '04 and then other than that, we really have nothing through the end of '05.

With that, I will turn it back over to Scott for some concluding remarks.

Thanks, Mike.

Before concluding remarks, turn to slide 21 to talk about corporate highlights that took place between the last reporting period and this reporting period. First was the -- our Board of Directors met and decided to maintain the current dividend rate and have stated at the present time we anticipate being in a position to continue to support our dividend through this challenging part of the economic cycle and the market. In addition, our Board elected Peter Quick as our lead Director and Chairman of the Nominating Governance Committee. It is made up entirely of independent directors and is responsible for the design implementation of the Company's Corporate Governance Policies and Practices and that's an initiative that he is leading at this time.

We also amended our annual Board of Directors' compensation policy during the quarter. We now provide that a significant portion of the independent directors' compensation is in the form of stock and this stock must be retained by the director as long as the director serves on our Board. In addition to independent directors, they're also committed to purchase stock in the marketplace and it's something that we would expect to see in the near-term.

Lastly, the Company amended certain provisions of the awards made under the long-term incentive plan that was adopted in March. Our company founders have waived their participation in the plan and the strike price on the outperformance portion of the plan increased from $18 a share where it was when the plan was put in place, to $22.40 per share, which takes an average over a preceding period.

Now just to turn to the outlook for '03, as I think you got the message, we do believe the markets are bottoming and we are well positioned to start recouping some of the space that we recently lost. We're pleased with the development -- with the activity at our development projects. I walked through 101 JFK, I think that's a good sign for that project. Our credit issues, particularly in the office portfolio, seemed to have subsided and there is no significant credit risks on the horizon, just hopefully that's worked it's way through with us. On the investment strategy we're executing on that and we expect additional opportunities to develop due to the present environment. From a disposition side, the activity remains on target. The land letter of intents in New Jersey are going to our contract. As it relates to RSVP, the restructuring is expected to completed during the third quarter and in addition we're targeting in additional dispositions of other noncore assets that we're working on right now. As it relates to guidance, we're reaffirming our previously-stated guidance at the lower end of the range.

With that, operator, I'd be glad to take any questions for myself or any other members of our team.

Okay, great. Ladies and gentlemen, at this time, if you do have a question, press star 1 on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue by pressing the pound key. If you are on a speaker phone, please pick up the handset before pressing the numbers. Again, for questions, please press star 1 at this time.

And the first question in queue from the line of Anthony Paolone from JP Morgan. Please go ahead.

Hi, good afternoon. The WorldCom space that you mentioned, the remaining space that has been amended, were there any changes in rental rates on that?

The rates did not change in many of the cases the real estate tap spaces were adjusted and in a few of the cases it was some free rent added in.

So... From an earnings standpoint, the balance from the 243,000 square feet shouldn't have an impact?

Other than the fact that there was adjustments to their -- their escalation bases. So, that would -- I guess they were brought current?

That's right.

So, that would have an impact, Tony.

Okay. In terms of the acquisition volume that you outlined, the $50 million, and I guess you put on top of that the option properties which are, you know, identifiable, but with respect to the 50, are those deals that are identified at this point? Or is that just something that you feel comfortable with?

Those are deals that we are in the -- the process of closing right now. We're in the process of, you know, finalizing. And there's, you know, just to give you a break down, it's a -- the biggest one is in office building in Connecticut, that is a building that's going through a transition stage that, you know, we've been working on for some time.

Okay. And since it's been a while since we've seen a lot of deal flow, I mean what should we expect in terms of cap rates?

Well, this building is go through a state of transition right now...so, you know, it's starting off on the lower end because of the occupancy but it's something that we're targeting to get into the mid to high 9s, you know, in stabilization in '04.

Okay. In terms of your calculation of FFO, I noticed this quarter the A and B preferreds were not included. Like what was the change there?

There is a, you know, a dilution calculation that you have to go through, Tony.

Uh-huh.

And there's a new methodology that's done. So, you have to go through the interrations to determine if they're dilutive or antidilutive. In some cases they will be in some cases they won't. In this particular period, they weren't.

And I guess that doesn't depend on the level of FFO?

Yeah, it does depend on that.

Okay. And then finally, looking out to '04, the bond that you have coming due, what's the rate?

The rate is 7.4.

Okay. And then finally, with respect to -- to guidance, how much in profits, in gains on the build to suit, do you have in guidance numbers at the low end as well as at the high end? Just to kind of...

The same amount, whatever... For the year it's about $9 million for the land . So it's -- and we've done about half of it at this point, right? A little more than half of it. About $6 million.

A little more than that, yeah.

So, there's probably $3 million remaining for the remainder of the year, for the land.

Okay. Great, thanks.

Next question is from the line of John Litt from Smith Barney. Please go ahead.

Good afternoon, it's Gary Boston here with John.

Scott, on the leasing looking forward to the second half of the year, just trying to -- to back into it, I guess, where you are in the process. It looks like you had, of the $425,000 that you've done since the end of the quarter in new leasing, if you -- if you put that with the 131 that was for future periods that you did during the quarter, that gets me to about 79% of what you're showing as future expirations in '03. Is that -- is that a pretty good ballpark number? Or is some of that 425 going to be '04/05 type of leasing?

About 120 of the 425 is '05.

Okay.

So, some of that would kick in there. That's probably the biggest chunk of something that is non, you know, not in the period type of thing.

Right.

But then even the -- this leasing I would say sort of back end, stuff that we've gotten out signed is stuff to have an impact on numbers. At the back of the end, just out of courtesy, the number you just quoted on the 130 -- the 131, is that what you're talking about?

Yeah.

I'm not sure -- 100% sure how much of that is -- of that 131 is in the -- is actually, you know, '03. I'm not exactly 100% sure of that. My guess is that there's a large percentage of it.

Okay. Could you just discuss, you know, you -- you made the point about the longer lease terms in the -- and the impact that's having on your TIs and leasing commissions. Can you sort of discuss that strategy? A lot of your competitors are peers, I think, are taking a different approach, which is to kind of go a little shorter given what's happened to the rest of the current environment, just trying to get thoughts on your thinking there?

Our view is that rents haven't gotten hit that hard. Face rents haven't gotten hit that hard. What's really gotten hit in the marketplace is bringing the tenants in, so, we're getting reasonable face rents, in our mind, plus we're getting bunks, typically in our leases. So, you know, if you have to put capital out, I think I've said before, I think that today tenants would rather take a higher face rent and more capital than have to come out-of-pocket themselves with capital. And so, you know, you are more likely to lease if you write the check and put the tenant in than if you don't write the check. And so, if we're going to write the check, we'd rather get a longer term lease with bumps in our rents so that we could, you know, make it up over time.

What type of bumps, if you have h to average it out, what types of bumps are you getting on an annual basis?

I'd say anywhere from, you know, 2 to 4%.

Okay. Just finally in that, John may have a follow-up, but you mentioned in your discussions of the markets that you're starting to see not only a pull slew down in the market, in certain markets, can you give us more detail on where you're seeing that.

In Manhattan, for example, you've seen Lehman Brothers pull space off the market in Manhattan recently. You know, there's been -- in New Jersey we've seen some incidences where tenants have pulled space off the market in they were contemplating subleasing. So, I think that's really where where we're seeing the biggest bulk for that type of thing.

It's John Litt. You said that WorldCom affirmed or signed up, I think it was it 200,000 square feet. Is that the same rent they've been paying? Or did they go for a lower rent?

We just had that question. What happened, John, is basically the rent stayed and they -- they negotiated new base years. So, that's kind of the only change and we got some extended term.

So, the pass throughs fell?

Yes, or will.

What's the net impact of that? What would have been the gross to gross?

I don't have the answer.

Is it material, like a couple of bucks?

I don't think it's that much. I don't think it's that much. Probably a dollar, say.

Okay, thank you.

Our next question is from the line of Lou Taylor from Deutsche Banc. Please go head.

Yeah, hi, thanks. As you look at your expirations out in '05 and '06 and given the higher leasing costs, I mean do you -- do you expect that payout ratio to stay over 100% through that time frame?

No, I think that, you know, depending -- I think it's a function of what happens in the market. I mean our perspective is that as the markets begin to strengthen, we'd be in a position where that starts to decline. Because you will not have to, you know, expend as many dollars as we are expanding today. And as you see in our stats, I mean we have good rent cushion for those years in terms of mark-to-market opportunities so we can, you know, been in a position to do some trading off. I think as I said earlier, just to answer John and Gary's question, that the market,our mind, is a market that's demanding concessions, TI's and, you know, capital more than it's demanding rent pressure,our markets to date. So, I think that as the markets strengthen that will shift and have a big impact. And if you look at the numbers that Mike laid out in the TI said, you saw that going above $2 per foot on TI leasing commission amortized over the lease term is a big number that hopefully comes down.

I mean do you really expect the -- the concession or the -- the Cap Ex dollars to shrink that fast over the next 12 to 18 months, given where vacancy rates are?

I think, again, as I said,our markets, you know, where we have the opportunities, was I expect them to start coming down.

Okay. Second question, just on the change in the long-term comp plan, the definition of founders, I mean how many individuals does that include? Is it --

It's Donald and Roger.

Pardon?

Donald and Roger.

Just the two, okay.

Yep.

All right. And on the development pipeline, you know, where you've got, you know, a number of projects listed there as planned and proposed and the like, how much interest is being capitalized on those projects? And, you know, is there potential for those costs to be expensed as maybe a development becomes, you know, less likely?

You know, right now the development properties are obviously being readied for occupancy, for example, our team was and now that's an operating property so that interest is being expensed now. The AIP 2000 was a development property that was leased. That's no longer being expensed -- capitalized, it's being expensed. And then the other properties are being, you know, prepared for either, you know, marketing for additional development or -- or for sale so -- but at some future period, we evaluate that on a quarter-to-quarter basis. To the extent that's not the case, Lou, we'd have to pull that out.

Right, I realize that, but, you know, given kind of where market conditions, given how much space is available throughout your markets and throughout the country, is it realistic to expect those things to really...

If you look at --

12 months or so...

If you look at the sites, the sites are, you know, sites that are built right into our business parks.

There's really two pieces when you look at this, Lou. One is, as Mike said, the sites we have are sites we're marking for build to suits like we did with First Data. In Rye Brook, we have another site that we're continually marketing and right now in discussions about another builder suit. It keeps happening, we go in and change plans.

The other thing, again, if we mentioned last quarter, a key part of our business plan is rezoning sites to get our higher, better use, based on the market conditions as you said. You may recall last quarter we talked about the two sites in New Jersey that were going to -- signing the contract and then to rezone to single family. The residential. And -- and then, you know, get a tremendous profit there. That's a big part of what we're doing right now, looking at every one of our land sites and looking at how to maximize value. Whether or not it's a build to suit development or whether it's a sale for a different use.

Okay. And next question pertains to the sale of the RSVP assets. Kind of where -- where are those negotiations or discussions -- I mean have you got, you know, signed NOIs and you're looking to go to contract? Got contracts you're looking to close? Or still preliminary discussions? Still marking? Where are you in that?

Again, Lou, this is something -- a little bit -- we we've actually negotiated a restructuring with the preferred investor, which UBS and Soris fund to buy them out. That's scheduled to close in the third quarter. We purchased at a discount and would give us more flexibility to dispose of assets. And so that's sort of what I call the fun level. The -- at the assets-specific level, there's been a number of sales that's actually being used to facilitate the buy out of the preferred. The -- the prioritization platform has been sold. The parking company has been sold. The medical office building company has been sold. All those three things have happened in the last 12 months. So that is now, you know, completed. And -- and so as soon as we get done with the restructuring, then we will seek to, you know, to -- to address the -- the balance of the platforms in a manner that, you know, gets the appropriate liquidity while maximizing the value.

Great, thank you.

Next question is from the line of Stewart Axelrod from Lehman Brothers. Please go ahead.

Hey, guys.

Hi, Stewart.

Just get me back to that LOi. The status, is that still a '04 close?

Yes, the contract will be signed probably this quarter, is our hope, you're talking about on the land?

Yep.

And -- but the -- in terms -- you want to talk about that?

Yeah, you know, the contract is subject to change the zone. So, the zoning process is anticipated to take, you know it could take 12 or 18 months it could be an '04 event, it could be a little later.

And in terms of booking any profits that would --

That won't be until we get the zoning completed.

Okay. Secondly, just on the New Jersey expirations in the second half of the year, could you address that? They seem to be off 40% of what's remaining, is that included in what you talked about with the discussions you've had so far?

The big number in the New Jersey expirations is the American Express at 101 JFK and that is -- that's 190-plus 95,000 square feet of it. The balance of it is obviously very small. I say that property is coming offline and will go through redevelopment. But it's got leases on half the building already.

Okay. And can you discuss any, you know, discussions with Moody's as it relates to the Company's credit rating to be Bo be A-3 with a negative outlook?

We just recently went into Moody's and had a fairly comprehensive review and they issued their opinion just recently, affirming the rating be AA-3 and with taking the outlook from stable to negative and I think if you read the report it essentially reflects the uncertainty in their markets. They're kind of negative bias toward the office sector. In some of the challenges we specifically face with respect to the MCI and HQ and Arthur Andersen space being released. I think they know that those are items that they would be looking at as we release that space and retain that cash flow that they'd be, you know, looking at the -- the outlook in a more positive manner.

Did the dividend come up in those conversations?

Yes, it did.

Okay.

Essentially it came up as part of the overall discussion about, you know, cash flow and where we are relative to losing some of our occupancy and then, again, the ability to release that space and get back that cash flow.

Okay. And lastly, just on the floating rate exposure, just what progress are you making on reduce that risk?

You know, I think at 20%, I think we're in a fairly moderate level of variable rate, but that being said, we will still look to monitor that very closely and look for an opportunity to take it long as we've had a history of doing.

Okay, great. Thanks.

Next question is from the line of John Lutzius from Green Street. Please go ahead.

Good morning.

Hey, John.

Scott, in our discussion of the earnings estimates for the year, you emphasized the low end of the range. Is that a change from our last call? Or has that been your position?

It's -- it's -- well, we always said the range, now I'm just coming to the low end of the range. But, yeah, I guess you can call it a change.

Okay. What's your best guess today, revised guess, on when you will be able to show dividend coverage?

You know, again, I think that depending on our performance and the performance of our markets, it's -- you know, we hope it's something that happens in '04,the second half of ''04.

As I understand it, your definition of CAD excludes Cap Ex that's incremental. Can you review your definition of incremental Cap Ex?

Incremental to us is the primarily development--related or leases associated with development or redevelopment/repositioning. Association if we make an investment in a building that we're redeveloping and repositioning, costs associated with that, we consider incremental. The ground-up development and the TI we consider incremental. Nothing would be in our pre-existing portfolio unless we take it through the redevelopment and repositioning phase would actually be in that category.

So, if you have a core building that has occupancy problems for a while that are later solved through recept --

That would be nonincremental. That would not be incremental.

The one other thing that we generally look as incremental, John, and we don't have a lot of it, is if we were to make a change to a building that essentially we believe will result in a higher level of income for that building, both in rents and the rolling out of revenue and return, we will incrementalize that type of expenditure. But, you know, we don't have a lot of that. So, I think if you look at our incremental cost, there is just not a lot there. So, most of what Scott said is relative to what we're looking at to kind of incremental would, you know, new development, redevelopment, that sort of thing. Repositioning.

Okay. Just following up a couple of the earlier questions -- what's the dollar amount of G&A and capitalized interest that you're capitalizing relative to projects and planning?

Capitalized interest for the quarter I believe was about $1.8 million.

Okay. And -- and that excludes the G&A portion, though, right?

Yes.

What's the G&A portion?

There's costs that are incurred down at the construction company relative to those projects to bring those projects to, you know, their -- their formation. That -- but that's related to architectural design and zoning and those kind of in-house expertise that we have that works on those projects. I don't know exactly what that number was for the quarter.

Do you have a sense of what the number is? Is it, you know, is it a million bucks or is it a small number?

I don't know. I don't know off the top of my head exactly what the number is.

Okay. And then just last question, related to RSVP, it seems like you're making good progress in liquidating some of the platforms, can you talk a little bit, Scott, about the idea that perhaps the -- the ones that have been liquidated are the easiest ones to liquidate? And the ones that remain to be liquidated are perhaps a little tougher? Is that fair?

I would say it's actually the opposite. The ones that we've actually liquidated were the ones that were some of the problem ones because they were the ones that we had to address the issues. For example, the -- the privatization with the correctional facility where there was a dispute between RSVP and its partner, which we have -- you know, that was a settlement that we went through and liquidated through that. You know, the -- the -- the parking company, again, was a more challenging because there was a lot of land and non-income producing assets in the parking company. The way I would look at it is that we -- in evaluating what we were doing, we went out and tried to target the -- the platforms where there were issues and leave us with either the platforms that have, you know, cash flow-type or more real estate-type, traditional real estate-type characteristics, like the student housing company, or projects that are under development today or have the development, you know, the potential like the -- the land in the Catskills, the Concord and grow singers or development project being done on the Illinois tollway right now that needs more time to mature.

Okay. So what's left is student housing, which you might argue is maybe readily sellable?

Right.

And then the other two things are more development oriented which may are more difficult?

Not necessarily difficult, I think we can sell them. It's a question of would we maximize the value? We've taken then this far. The Catskills are a prime example. The New York State supreme court ruled that gaming would be permitted in the Catskills, which opens up the last sort of major issue to get something happening there. They've already appointed, you know, agreed on one site. There is two other sites to be agreed on. You know, so, yeah, you could sell it today, but you're not going to get the value you'd get if you wait another six months to a year. As an example.

Okay. And then --

Same --

And just to summarize, has Reckson -- did you expect Reckson to get any cash out of RSVP III and then also, what are your expectations for '04?

I think we said in our last call that -- the call prior to that, that we're now deferred cash in '03 because the cash is going out to buy out the preferred holder. But that in '04, we'd forecast getting about $30 million at some point and anything beyond that I think would, you know, anything beyond '04 would be depending on what happens with the -- the two development-like projects.

Got it. Thank you.

Thank you.

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